Compared to the FIFO method of accounting, during periods of rapidly rising prices and increasing inventory quantities, LIFO would most likely result in a higher: A. cash flow B. income tax C. working capital D. inventory balance I chose A but the answer is D??
i believe the answer here should be A
Rising Prices LIFO Net Income Lower Income Tax Lower WC = CA - CL --> Lower Inventory Balance Lower AT Cash Flow would be higher, because Income taxes going out are lower. So Ans A.
The answer is C. I thought it was A too. This question is from practice exam 4 from CFAI. Is it an error then???
ans should be a.
With LIFO and rising prices, the expensive recently purchased items go to COGS and the inexpensive items purchased in the past stay in inventory. Inventory is lower and COGS is higher. Because of higher COGS, net income is lower and taxes are lower. Hence cash flow is higher (answer A). Answer B is incorrect because taxes are lower, not higher. Answer C is incorrect because inventory, part of working capital, is lower rather than higher. Answer D is incorrect because inventory is lower, not higher.
Ans. is A… this comes from one of the cfai practice exams
The answer should be A. As others mentioned, during rising prices the LIFO method will result in having a higher COGS when compared to the FIFO method. Since the expense being deducted from sales is higher, the Net Income will be lower. Lower Net Income means lower tax expense, which results in having higher cash flow.
i took this exam online, it was a question on the fourth online test i think, and i distinctly recall the answer being A so either you are mistaken wendy or you are trying to confuse, ive noticed alot of people posting wrong formulas these last few days, i think people should double check everything they read on hear, conspiracy theory perhaps, its in many peoples interest to lower the average… use the books, i browse here occasionally but this site can really confuse you sometimes! answer is A
but why the lower tax expense would increase the CFO? if anyway the net Income is lower how can the cfo be higher? especially because taxes are calcualtated to the ebit level.
thank you
Regardless whether a company chooses LIFO or FIFO, the cash they pay to their suppliers for the goods remains the same. Just the difference is whether or not the increased costs are reflected in COGS (on the income statement) or reflected in Inventory (on the balance sheet). Taxes aside, the increased costs will be reflected in the CFO, regardless of which inventory method they choose (either in the form of higher COGS or higher changes in working capital).
Now when we account for taxes, taxes are affected by the income statement items, so if a company’s EBT is lower, then the taxes paid is lower, and therefore the CFO is higher.